Options Glossary A-C

Options Glossary A-C

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Adjustment
The process of buying or selling instruments to bring your position delta back to zero and increase profits.

All Ordinaries Index The major index of Australian stocks. This index represents 280 of the most active listed companies or the majority of the equity capitalization (excluding foreign companies) listed on the Australia Stock Exchange (ASX).

American Stock Exchange (AMEX)
A private, not-for-profit corporation, located in New York City, that handles approximately one-fifth of all securities trades within the United States.

American Style Option
An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.

Amortization
The paying off of debt in regular installments over a period of time.

Analyst
Employee of a brokerage or fund management house who studies companies and makes buy and sell recommendations on their stocks. Most specialize in a specific industry.

Annual Earnings Change (%)
The historical earnings change between the most recently reported fiscal year earnings and the preceding.

Annual Net Profit Margin (%)
The percentage that the company earned from gross sales for the most recently reported fiscal year.

Annual Percentage Rate (APR)
The cost of credit that the consumer pays, expressed as a simple annual percentage.

Annual Report
A report issued by a company to its shareholders at the end of the fiscal year containing a description of the firm's operations and financial statements.

Annual Return
The simple rate of return earned by an investment for each year.

Annuity
A series of constant payments at uniform time intervals (for example, periodic interest payments on a bond).

Appreciation
The increase in value of an asset.

Arbitrage
The simultaneous purchase and sale of identical financial instruments or commodity futures in order to make a profit where the selling price is higher than the buying price.

Arbitrageur
An individual or company that takes advantage of momentary disparities in prices between markets which enables them to lock in profits because the selling price is higher than the buying price.

ATM IV
A quadratic curve fit is made between the IV values and the strike prices for all the call options for a stock for a given expiration month. Likewise a curve fit is done for the puts. The option IV assigned for that option series fit is the constant coefficient of the polynomial. This constant coefficient is the point in the quadratic curve fit where the slope is zero and the option polynomial "smile" is at a minimum.

This option series IV is usually very close to the IV of the close price of the stock because the weights in the polynomial curve fit emphasize the At the Money (ATM) strikes. This option series IV is referred to as the ATM IV in the Optionetics option trade ranker tool.

At-the-Opening Order
An order which specifies execution at the opening of the market or else it is canceled.

Auction Market
A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. Most stock and bond markets, including those on the NYSE, function this way.

Automatic Exercise
The automatic exercise of an in-the-money option at expiration by the clearing firm.

Average
An mathematical representation of the behavior of a specific sector or index of the market (for example, the Dow Jones Industrial Average).

B

Back Months
The futures or options on futures months being traded that are furthest from expiration.

Backspread
A spread in which more options are purchased than sold and where all options have the same underlying and expiration date. Backspreads are usually delta neutral.

Back-Testing
The testing of a strategy based on historical data to see if the results are consistent.

Bear
An investor who acts on the belief that a security or the market is falling or is expected to fall.

Bear Call Spread
A strategy in which a trader sells a lower strike call and buys a higher strike call to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between the strike prices less credit; Maximum gain = credit; requires margin.

Bear Market
A declining stock market over a prolonged period of time usually caused by a weak economy and subsequent decreased corporate profits.

Bear Put Spread
A strategy in which a trader sells a lower strike put and buys a higher strike put to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = d ifference between strike prices less the debit; no margin.

Bid
The highest price at which a floor broker, trader or dealer is willing to buy a security or commodity for a specified time.

Bid and Asked
The bid (the highest price a buyer is prepared to pay for a trading asset) and the asked (the lowest price acceptable to a prospective seller of the same security) together comprise a quotation, or quote.

Bid-asked Spread
The difference between bid and asked prices constitute the bid-asked spread.

Bid Up
Demand for an asset drives up the price paid by buyers.

Block Trade
A trade so large (for example, 10,000 shares of stock or $200,000 worth of bonds) that the normal auction market cannot absorb it in a reasonable time at a reasonable price.

Blow-Off Top
A steep and rapid increase in price followed by a steep and rapid drop in price. This indicator is often used in technical analysis.

Blue Chips
This term is derived from poker where blue chips hold the most value. Blue chips in the stock market are stocks with the best market capitalization in the marketplace.

Blue Chip Stock
A stock with solid value, good security, and a record of dividend payments or other desirable investment characteristics. Many times they have a record of consistent dividend payments, receive extensive media coverage and offer a host of other benefic ial investment attributes. On the downside, blue chip stocks tend to be quite expensive and often have little room for growth.

Board Lot
The smallest quantity of shares traded on an exchange at standard commission rates.

Bond
Financial instruments representing debt obligations issued by the government or corporations traded in the futures market. A bond promises to pay its holders periodic interest at a fixed rate (the coupon), and to repay the principal of the loan at mat urity. Bonds are issued with a par or face value of $1,000. Bonds are traded based upon their interest rates - if the bond pays more interest than available elsewhere, its worth increases.

Break-even
The point at which gains equal losses.
The market price that a stock or future must reach for an option to avoid loss if exercised.
For a call, the break-even equals the strike price plus the premium paid.
For a put, the break-even equals the strike price minus the premium paid.

Breakout
A rise in the price of an underlying instrument above its resistance level or a drop below the support level.

Broad-based Index
An index designed to reflect the movement of the market as a whole. (For example, the S&P; 100, the S&P; 500, and the AMEX Major Market Index).

Broker
An individual or firm which charges a commission for executing buy and sell orders.

Bull
An investor who believes that a market is rising or is expected to rise.

Bull Call Spread
A strategy in which a trader buys a lower strike call and sells a higher strike call to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = debit; Maximum gain = difference between strike prices less the debit; no margin.

Bull Market
A rising stock market over a prolonged period of time usually caused by a strong economy and subsequent increased corporate profits.

Bull Put Spread
A strategy in which a trader sells a higher strike put and buys a lower strike put to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between strike prices less credit; Maximum gain = credit; requires margin.

Butterfly Spread
The sale (purchase) of two identical options, together with the purchase (sale) of one option with an immediately higher strike, and one option with an immediately lower strike. All options must be the same type, have the same underlying and have the same expiration date.

Buy IV Sell IV
Many options are spreads that have a buy option leg and a sell option leg. Buy IV is the implied volatility of the option leg with a buy component. Sell IV is the implied volatility of the option leg with a sell component.

Buy on Close
To buy at the end of a trading session at a price within the closing range.

Buy on Opening
To buy at the beginning of a trading session at a price within the opening range.

Buy Stop Order
An order to purchase a security entered at a price above the current offering price triggered when the market hits a specified price.

C

CAC 40 Index
A broad-based index of 40 common stocks on the Paris Bourse.

Calendar Spread
A spread consisting of one long and one short option of the same type with the same exercise price, but which expire in different months.

Call Option
An option contract which gives the holder the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time in exchange for a paying a premium.

Call Premium
The amount a call option costs.

Capital
The amount of money an individual or business has available.

Capital Gain
The profit realized when a capital asset is sold for a higher price than the purchase price.

Capital Loss
The loss incurred when a capital asset is sold for a lower price than the purchase price.

Capitalization
Refers to the current value of a corporation's outstanding shares in dollars.

Capped-style Option
An option with an established profit cap or cap price.

Cash Account
An account in which the customer is required to pay in full for all purchased securities.

Cash Dividend
A dividend paid in cash to a shareholder out of a corporation's profits.

Change
The difference between the current price and the price of the previous day of a security.

Chicago Board Options Exchange (CBOE)
The largest options exchange in the United States.

Chicago Board of Trade (CBOT)
Established in 1886, the CBOT is the oldest commodity exchange in the United States and primarily lists grains, T-Bonds and notes, metals and indexes.

Class of Options
Option contracts of the same type (call or put), style and underlying security.

Clearinghouse
An institution established separately from the exchanges to ensure timely payment and delivery of securities.

Close
The price of the last transaction for a particular security each day.

Closing Purchase
A transaction to eliminate a short position.

Closing Range
The high and low prices recorded during the period designated as the official close.

Closing Sale
A transaction to eliminate a long position.

Commission
A service charge assessed by a broker and his/her investment company in return for arranging the purchase or sale of a security.

Commodity
Any bulk good traded on an exchange (for example, metals, grains and meats).

Commodity Futures Trading Commission (CFTC)
The CFTC was created by the Commodity Futures Trading Commission Act of 1974 to ensure the open and efficient operation of the futures markets.

Condor
The sale or purchase of 2 options with consecutive exercise prices, together with the sale or purchase of 1 option with an immediately lower exercise price and 1 option with an immediately higher exercise price.

Consumer Price Index (CPI)
A measure of price changes in consumer goods and services. This index is used to identify periods of economic inflation or deflation.

Contract
A unit of trading for a financial or commodity future, or option.

Correction
A sudden decline in the price of a security after a period of market strength.

Covered Call
A short call option position against a long position in an underlying stock or futures.

Covered Put
A short put option position against a short position in an underlying stock or futures.

Credit Spread
The difference in value between 2 options, where the value of the short position exceeds the value of the long position.

Cross Rate
The current exchange rate between differing currencies.

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